Empire State Building better to visit than buy

By Agnes T. CraneThe author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Investors might want to pause for breath before climbing onto the Empire State Building’s initial public offering. The iconic midtown edifice that King Kong climbed almost 80 years ago is the biggest revenue generator of the 12 buildings that make up Empire State Realty Trust – in large part thanks to income from tourism and broadcasting. But with a rising challenge downtown, fans may prefer scaling the tower to investing in the company that owns it.

At first look, the real-estate investment trust looks solid. The company’s annualized revenue for the first nine months of 2011 grew by 7 percent and earnings before interest, taxes, depreciation and amortization by 10 percent. And its chief money spinner also enjoys some diverse income. That’s lucky as the Empire State Building is hardly a rental gem – a third of its office space is unoccupied and its net effective rent is only the fifth highest of the seven buildings the REIT operates in Manhattan.

It’s not a typical office space, though. Being beloved by tourists, architects and film buffs from around the world is a huge benefit: fees from visiting the building’s observation decks for the bird’s eye views of the city account for more than 40 percent of the tower’s revenue. Another 12 percent of revenue stems from broadcast licenses and leases, thanks to its status as the tallest building in the city.

But One World Trade Center is expected to be completed next year. At 1,776 feet it will be the tallest office structure in the nation and a natural competitor to the Empire State Building. Its 2.6 million square feet with modern infrastructure and amenities could siphon off midtown tenants. Its two floors dedicated to television broadcasters and 408-foot antenna could also cut into its midtown rival’s revenue.

The dual stock class structure should also give investors pause, as it grants 50 votes to holders of class B shares – doubtless to be held by the Malkin family. With the resurgent downtown area competing for income and the ESB’s current owners holding onto power, prospective investors might be better off plopping down $37 to enjoy the views.